Deep Dive into Financial Statements: Knowledge About Current Assets (Current Asset) That Investors Need to Know

Why Short-Term Liquidity Is Important for Investors

Assessing a company’s financial strength is not only about looking at high profits. In reality, what determines market presence is the ability to survive during a crisis, which means having cash and assets that can be quickly converted into cash.

On the (Balance Sheet), assets are mainly divided into two categories: the first is assets that can be converted into cash in the short term, and the second is assets that the company must hold long-term to operate. Understanding this distinction is extremely important.

What Are Current Assets: Definition and Importance

Current Assets (Current Asset) are assets that can be converted back into cash within a period of no more than 1 year.

Why are they called “current”? Because these assets are constantly moving—they don’t sit still but circulate in business operations. Cash deposits are withdrawn, goods are sold, receivables are collected, etc.

Tracking this figure is crucial because it indicates the company’s short-term liquidity. If a company faces financial difficulties, such as being unable to sell daily goods or experiencing temporary revenue stops, it can draw on these assets to convert into cash for expenses.

The more current assets a company has, the higher its chances of surviving a crisis.

The Difference Between the Two Types of Assets

A company must have at least two types of assets to operate:

Current Assets (Current Asset) are characterized by:

• Can be converted into cash within 1 year
• Highly liquid
• Used to cover short-term expenses

Noncurrent Assets (Noncurrent Asset) are the opposite:

• Must be held for more than 1 year
• Cannot be easily converted into cash, such as land, buildings, machinery
• Important for the company’s long-term operations

What Comprises Current Assets

Knowing the types of current assets is essential because not all types are of the same quality.

###Cash (Cash) This is the most liquid asset, usable immediately. The downside is that cash does not generate returns. If a company holds too much cash, it misses opportunities to earn income.

###Cash Equivalents (Cash Equivalents) Assets close to cash, can be converted back quickly, and offer the benefit of earning interest. However, they carry slight risks related to bank stability.

###Short-term Investments (Short-term Investment) Companies buy and hold these to generate additional income, such as stocks, bonds, gold. They carry higher risks but can produce returns.

###Notes Receivable (Notes Receivable) Debt agreements with less than 1-year maturity, earning interest, but with the risk that the borrower may default.

###Trade Receivables (Receivable) Money owed by customers that has not yet been paid. In a crisis, customers might delay payments or not pay at all. This makes receivables a relatively high-risk asset.

###Inventory (Inventory) Finished goods or raw materials waiting to be sold. Excess or obsolete inventory can become a “sunk cost” for the company.

###Office Supplies (Supplies) Consumable materials that are used up and generally have low value.

###Unearned Revenue and Prepaid Expenses (Accrued Revenue & Prepaid Expenses) Revenue that is likely to be earned or expenses paid in advance by the company to benefit in the future.

How to Read and Analyze Current Assets

When looking at a balance sheet, investors should observe three things:

1. Total Amount How much total current assets are there? The more, the better, as it provides clues.

2. Composition What proportion of current assets is cash, receivables, inventory, or short-term investments? A high cash proportion indicates good preparedness for crises, while a high receivables proportion suggests higher risk of non-collection.

3. Trend of Changes Compare this figure with the previous year—has it increased or decreased? What does that imply?

Case Study: Apple - A Company with Excellent Liquidity

Apple (AAPL) is known as one of the most liquid companies in the world. Even during the early stages of the COVID-19 pandemic, CEO Tim Cook confidently announced that liquidity was not an issue for Apple.

In 2019, Apple had total current assets of $162.8 billion, with cash and near-cash assets accounting for $59 billion.

In 2020, notable changes occurred:

This change, if observed carefully, indicates that Apple used its cash to invest while also extending the collection period from partners, possibly as a policy to adapt to the situation or a sign of reduced collection ability.

Further analysis helps investors see that it’s not enough to look at total figures; they need to dig deeper into “where the money is.”

How Good Is the Quality of Current Assets?

Not all current assets are of equal quality. Some can be converted into cash with certainty, while others may disappoint.

High-Quality Assets:

• Cash: 100% convertible
• Cash equivalents: Fully convertible
• Notes receivable from creditworthy parties: Usually paid on time

Lower-Quality Assets:

• Trade receivables: In a crisis, payments may be delayed or not made
• Inventory: Unsold goods may have no value

Therefore, investors should evaluate the composition of current assets, not just the total number.

Summary

Current Assets (Current Asset) are a key indicator in financial statements, helping investors understand the company’s short-term risk and strength.

Properly analyzing a balance sheet is not easy; it requires understanding definitions, examining components, and comparing trends. If investors can do this, they will see whether the company they are investing in can continue forward during a crisis or how it must manage risks.